The South African Rand rallied sharply on the back of a better-than-expected Standard Bank PMI, which suggested that the economy is recovering some of its lost strength.
While the index was unable to rise back above the neutral baseline of 50, instead clocking in at 49.6, this was still enough of an improvement to encourage investors.
With the economy seeming to be moving in the right direction once again there was little reason not to favour the Rand at this juncture, in spite of its underlying weakness.
A general uptick in market risk appetite also weighed on the EUR ZAR exchange rate ahead of the weekend, with emerging-market currencies such as the Rand seeing an additional boost.
EUR ZAR Exchange Rate Dented by Rising Catalan Tensions
Confidence in the Euro has been somewhat muted, meanwhile, thanks to a fresh escalation in tensions in Catalonia.
As eight members of the deposed regional administration were remanded in custody this prompted renewed unrest amongst Catalans, who see the move as purely political in nature.
With former president Carles Puigdemont refusing to return from Brussels prosecutors have requested that a European arrest warrant be issued, something which could fuel the further unrest in the region.
While markets no longer fear that Catalonia will achieve its goal of independence the crisis is still likely to put pressure on EUR exchange rates over the coming days.
Unless the situation is seen to calm down once again the single currency could struggle to maintain any particular upside traction in the near term.
Solid Eurozone Services PMIs May Boost Euro Demand
Even so, the EUR ZAR exchange rate could find some support on Monday if the finalised raft of Eurozone services PMIs for October prove encouraging.
After the corresponding Eurozone manufacturing PMI rose to an 80-month high of 58.5 this spurred hopes that the currency union could end the year on a strong footing.
If signs continue to point towards Eurozone growth outstripping that of the US for the second year in a row this could improve the appeal of the Euro.
However, the single currency is still vulnerable to downside disappointments thanks to the more ambivalent outlook of the European Central Bank (ECB).
Confidence in the Euro could also be dented if German factory orders are found to have fallen back in September.
Rand Forecast to Remain Under Pressure from Politics
The political situation in South Africa remains a significant headwind for the Rand, especially in the wake of the unimpressive mid-term budget.
With infrastructure investment still lacking and the debt load likely to increase in the coming months there is a risk that the country faces fresh downgrades from the rating agencies.
This is likely to keep a lid on any ZAR exchange rate gains, especially if domestic data fails to provide further signs of improvement.
Thursday’s mining and manufacturing production figures could keep the Rand on a stronger footing, though, providing that the sector continues to demonstrate solid growth on the year.
However, a fresh narrowing of South Africa’s foreign exchange reserves could prove rather more discouraging, offering the EUR ZAR exchange rate a rallying point.